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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________________ to ________________
Commission File No. 1-11778 I.R.S. Employer Identification No. 98-0091805
ACE LIMITED
(Incorporated in the Cayman Islands)
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM 08
Bermuda
Telephone 441-295-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
---- ----
The number of registrant's Ordinary Shares ($0.041666667 par value) outstanding
as of August 9, 2002 was 262,403,174.
ACE LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
--------------------- Page No.
--------
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 2002 and 2001 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Six Months Ended June 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income (Unaudited)
Six Months Ended June 30, 2002 and 2001 7
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2002 and 2001 8
Notes to Interim Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 31
Part II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 71
Item 4. Submission of Matters to a Vote of Security Holders 71
Item 5. Other Information 71
Item 6. Exhibits and Reports on Form 8-K 72
2
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31
2002 2001
------------- -------------
(Unaudited)
(in thousands of U.S. dollars,
except share and per share data)
Assets
Investments and cash
Fixed maturities available for sale, at fair value
(amortized cost - $12,535,308 and $12,794,444) $ 12,833,569 $ 13,000,165
Equity securities, at fair value (cost - $566,666 and $516,028) 462,075 467,566
Securities on loan, at fair value (cost - $411,023 and $0) 410,636 -
Short-term investments, at fair value 1,774,437 1,205,795
Other investments, (cost - $601,090 and $569,045) 628,234 591,006
Cash 877,779 671,381
------------ ------------
Total investments and cash 16,986,730 15,935,913
Accrued investment income 194,505 213,821
Insurance and reinsurance balances receivable 3,181,242 2,521,562
Accounts and notes receivable 248,916 242,724
Reinsurance recoverable 11,636,647 11,398,446
Deferred policy acquisition costs 781,264 679,281
Prepaid reinsurance premiums 1,373,065 1,222,795
Goodwill 2,716,513 2,772,094
Deferred tax assets 1,188,405 1,250,835
Other assets 1,015,929 949,293
------------ ------------
Total assets $ 39,323,216 $ 37,186,764
============ ============
Liabilities
Unpaid losses and loss expenses $ 20,661,359 $ 20,728,122
Future policy benefits for life and annuity contracts 392,625 382,730
Unearned premiums 4,936,803 3,853,429
Premiums received in advance 53,711 57,486
Insurance and reinsurance balances payable 1,708,094 1,418,001
Contract holder deposit funds 90,660 101,187
Securities lending collateral 419,446 -
Accounts payable, accrued expenses and other liabilities 1,619,847 1,466,127
Dividends payable 47,647 42,044
Short-term debt 224,364 495,408
Long-term debt 1,798,803 1,349,473
Trust preferred securities 675,000 875,000
------------ ------------
Total liabilities 32,628,359 30,769,007
------------ ------------
Commitments and contingencies
Mezzanine equity 311,050 311,050
------------ ------------
Shareholders' equity
Ordinary Shares ($0.041666667 par value, 500,000,000 shares authorized;
262,247,758 and 259,861,205 shares issued and outstanding) 10,927 10,828
Additional paid-in capital 3,775,079 3,710,698
Unearned stock grant compensation (52,289) (37,994)
Retained earnings 2,526,584 2,321,576
Deferred compensation obligation 18,850 16,497
Accumulated other comprehensive income 123,506 101,599
Ordinary Shares issued to employee trust (18,850) (16,497)
------------ ------------
Total shareholders' equity 6,383,807 6,106,707
------------ ------------
Total liabilities, mezzanine equity and shareholders' equity $ 39,323,216 $ 37,186,764
============ ============
See accompanying notes to the interim consolidated financial statements
3
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2002 and 2001
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in thousands of U.S. dollars, except per share data)
Revenues
Gross premiums written
Property and casualty premiums $ 2,901,242 $ 2,372,622 $ 5,990,190 $ 4,933,320
Life and annuity premiums 27,713 30,039 56,911 30,979
------------ ------------ ------------ ------------
2,928,955 2,402,661 6,047,101 4,964,299
Reinsurance premiums ceded (1,053,577) (932,016) (2,185,695) (1,758,536)
------------ ------------ ------------ ------------
Net premiums written
Property and casualty premiums 1,848,707 1,440,606 3,806,456 3,174,784
Life and annuity premiums 26,671 30,039 54,950 30,979
------------ ------------ ------------ ------------
1,875,378 1,470,645 3,861,406 3,205,763
Change in unearned premiums (299,671) (85,458) (925,890) (451,460)
------------ ------------ ------------ ------------
Net premiums earned
Property and casualty premiums 1,549,398 1,355,148 2,880,795 2,723,324
Life and annuity premiums 26,309 30,039 54,721 30,979
------------ ------------ ------------ ------------
1,575,707 1,385,187 2,935,516 2,754,303
Net investment income 200,804 196,267 400,939 400,697
Other income (expense) (12,068) 1,088 (7,269) 2,685
Net realized gains (losses) on investments (139,721) 15,564 (165,602) (3,811)
------------ ------------ ------------ ------------
Total revenues 1,624,722 1,598,106 3,163,584 3,153,874
------------ ------------ ------------ ------------
Expenses
Losses and loss expenses 960,949 954,841 1,814,094 1,906,134
Life and annuity benefits 23,311 28,152 46,307 28,805
Policy acquisition costs 234,208 187,640 432,003 354,330
Administrative expenses 229,726 208,194 426,929 403,084
Interest expense 51,952 49,640 97,954 103,964
Amortization of goodwill - 19,872 - 39,752
------------ ------------ ------------ ------------
Total expenses 1,500,146 1,448,339 2,817,287 2,836,069
------------ ------------ ------------ ------------
Income before income tax and cumulative effect
of adopting a new accounting standard 124,576 149,767 346,297 317,805
Income tax expense 20,676 18,250 44,592 45,224
------------ ------------ ------------ ------------
Income before cumulative effect of adopting a
new accounting standard 103,900 131,517 301,705 272,581
Cumulative effect of adopting a new accounting
standard (net of income tax) - - - (22,670)
------------ ------------ ------------ ------------
Net income $ 103,900 $ 131,517 $ 301,705 $ 249,911
============ ============ ============ ============
Basic earnings per share before cumulative effect
of adopting a new accounting standard $ 0.37 $ 0.54 $ 1.11 $ 1.12
============ ============ ============ ============
Basic earnings per share $ 0.37 $ 0.54 $ 1.11 $ 1.02
============ ============ ============ ============
Diluted earnings per share before cumulative
effect of adopting a new accounting standard $ 0.36 $ 0.52 $ 1.06 $ 1.07
============ ============ ============ ============
Diluted earnings per share
$ 0.36 $ 0.52 $ 1.06 $ 0.98
============ ============ ============ ============
See accompanying notes to the interim consolidated financial statements
4
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the six months ended June 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
(in thousands of U.S. dollars)
Ordinary Shares
Balance - beginning of period $ 10,828 $ 9,681
Shares issued 35 7
Exercise of stock options 74 35
Issued under Employee Stock Purchase Plan (ESPP) 5 4
Cancellation of Shares (15) (21)
Repurchase of Shares - (63)
----------- ------------
Balance - end of period 10,927 9,643
----------- ------------
Additional paid-in capital
Balance - beginning of period 3,710,698 2,637,084
Ordinary Shares issued 35,598 2,567
Exercise of stock options 37,466 16,439
Ordinary Shares issued under ESPP 3,739 2,806
Cancellation of Ordinary Shares (12,422) (13,522)
Repurchase of Ordinary Shares - (17,195)
----------- ------------
Balance - end of period 3,775,079 2,628,179
----------- ------------
Unearned stock grant compensation
Balance - beginning of period (37,994) (29,642)
Stock grants awarded (37,313) (18,474)
Stock grants forfeited 6,111 133
Amortization 16,907 4,541
----------- ------------
Balance - end of period (52,289) (43,442)
----------- ------------
Retained earnings
Balance - beginning of period 2,321,576 2,733,633
Net income 301,705 249,911
Dividends declared on Ordinary Shares (83,867) (64,797)
Dividends declared on FELINE PRIDES (12,830) (12,763)
Repurchase of Ordinary Shares - (32,422)
----------- ------------
Balance - end of period 2,526,584 2,873,562
----------- ------------
Deferred compensation obligation
Balance - beginning of period 16,497 14,597
Net increase to obligation 2,353 1,900
----------- ------------
Balance - end of period $ 18,850 $ 16,497
----------- ------------
See accompanying notes to the interim consolidated financial statements
5
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (cont'd.)
For the six months ended June 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
(in thousands of U.S. dollars)
Accumulated other comprehensive income
Net unrealized appreciation
(depreciation) on investments
Balance - beginning of period $ 136,916 $ 102,335
Change in period, net of tax 22,695 (4,846)
Balance - end of period ------------ -----------
159,611 97,489
------------ -----------
Cumulative translation adjustments
Balance - beginning of period (35,317) (32,881)
Change in period, net of tax (788) (7,712)
------------ -----------
Balance - end of period (36,105) (40,593)
------------ -----------
Accumulated other comprehensive 123,506 56,896
income ------------ -----------
Ordinary Shares issued to employee trust
Balance - beginning of period (16,497) (14,597)
Net increases in Ordinary Shares (2,353) (1,900)
------------ -----------
Balance - end of period (18,850) (16,497)
------------ -----------
Total shareholders' equity $ 6,383,807 $ 5,524,838
============ ===========
See accompanying notes to the interim consolidated financial statements
6
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the six months ended June 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
(in thousands of U.S. dollars)
Net income $ 301,705 $ 249,911
Other comprehensive income (loss)
Net unrealized appreciation
(depreciation) on investments
Unrealized appreciation (depreciation) on investments 29,633 11,100
Less: reclassification adjustment for net realized
(gains) losses included in net income 14,874 (9,167)
---------- ----------
44,507 1,933
Cumulative translation adjustments (358) (15,965)
---------- ----------
Other comprehensive income (loss), before income tax 44,149 (14,032)
Income tax benefit (expense) related to other comprehensive
income items (22,242) 1,474
---------- ----------
Other comprehensive income (loss) 21,907 (12,558)
---------- ----------
Comprehensive income $ 323,612 $ 237,353
========== ==========
See accompanying notes to the interim consolidated financial statements
7
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
(in thousands of U.S. dollars)
Cash flows from operating activities
Net income $ 301,705 $ 249,911
Adjustments to reconcile net income to net cash provided by
operating activities:
Unpaid losses and loss expenses, net of reinsurance
recoverable (315,530) 154,694
Future policy benefits for life and annuity contracts 8,021 28,881
Unearned premiums 1,070,943 686,575
Prepaid reinsurance premiums (150,270) (224,703)
Deferred income taxes 39,735 16,107
Net realized losses on investments 119,929 3,811
Amortization of premium/discounts on fixed maturities 17,563 (3,534)
Deferred policy acquisition costs (98,525) (90,373)
Insurance and reinsurance balances receivable (666,713) (333,000)
Premiums received in advance (3,775) 1,876
Insurance and reinsurance balances payable 287,278 33,422
Accounts payable, accrued expenses and other liabilities (8,353) (52,737)
Other (30,913) (60,007)
Cumulative effect of adopting a new accounting standard - 22,670
Amortization of goodwill - 39,752
----------- -----------
Net cash flows from operating activities $ 571,095 $ 473,345
----------- -----------
Cash flows from investing activities
Purchases of fixed maturities (8,712,886) (7,689,345)
Purchases of equity securities (128,903) (115,970)
Sales of fixed maturities 8,373,776 7,383,010
Sales of equity securities 84,287 113,672
Maturities of fixed maturities 139,875 24,000
Net realized losses on financial futures contracts (60,800) (17,695)
Acquisition of subsidiaries, net of cash acquired 54,728 -
Other (43,250) (37,246)
----------- -----------
Net cash used for investing activities $ (293,173) $ (339,574)
----------- -----------
Cash flows from financing activities
Dividends paid on Ordinary Shares (78,264) (60,070)
Dividends paid on FELINE PRIDES (12,830) (12,835)
Net proceeds from (repayment of) short-term debt (271,044) 38,780
Repayment of trust preferred securities (200,000) -
Proceeds from exercise of options for Ordinary Shares 37,540 16,474
Proceeds from shares issued under ESPP 3,744 2,810
Proceeds from long-term debt 449,330 -
Repurchase of Ordinary Shares - (49,680)
----------- -----------
Net cash used for financing activities $ (71,524) $ (64,521)
----------- -----------
Net increase in cash 206,398 69,250
Cash - beginning of period 671,381 608,069
----------- -----------
Cash - end of period $ 877,779 $ 677,319
=========== ===========
See accompanying notes to the interim consolidated financial statements
8
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements
(Unaudited)
1. General
The interim unaudited consolidated financial statements, which include the
accounts of the Company and its subsidiaries, have been prepared in accordance
with accounting principles generally accepted in the United States of America
and, in the opinion of management, reflect all adjustments (consisting of
normally recurring accruals) necessary for a fair presentation of results for
such periods. The results of operations and cash flows for any interim period
are not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the consolidated financial
statements, and related notes thereto, included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
ACE Limited ("ACE" or "the Company") is a holding company incorporated with
limited liability under the Cayman Islands Companies Law and maintains its
principal business office in Bermuda. The Company, through its various
subsidiaries, provides a broad range of insurance and reinsurance products to
insureds worldwide. During the first quarter of 2002, following changes in
executive management responsibilities, the Company reassessed and changed its
reporting segments from the individual operating units to lines of business.
The four reporting segments are: Insurance - North American, Insurance -
Overseas General, Global Reinsurance and Financial Products. These segments
are described in Note 14.
The following table summarizes the Company's gross premiums written by
geographic region for the six months ended June 30, 2002 and 2001. Allocations
have been made on the basis of location of risk:
Six Months North Australia & Asia
Ended America Europe New Zealand Pacific Latin America
June 30, 2002 62% 24% 2% 8% 4%
June 30, 2001 58% 25% 2% 9% 6%
2. New accounting pronouncements
In June 2001, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142 primarily addresses the accounting
for goodwill and intangible assets subsequent to their acquisition. As
required, the Company adopted FAS 142 on January 1, 2002 and ceased
amortizing goodwill at that time. All goodwill recognized in the Company's
consolidated balance sheet at January 1, 2002 was assigned to one or more
reporting units. FAS 142 requires that goodwill in each reporting unit be
tested for impairment by June 30, 2002. Any impairment loss recognized as a
result of a transitional impairment test of goodwill should be reported as
the cumulative effect of a change in accounting principle. Management has
determined that there was no impairment in goodwill as a result of the
test. As discussed in Note 14 "Segment information", we do not allocate
assets to our new segments, therefore, changes in goodwill are not
disclosed by segment. The following table details the movement in goodwill
during the six months ended June 30, 2002. The reduction in goodwill is
primarily a result of the settlement of a lawsuit involving a prior
acquisition.
ACE
Consolidated
--------------
Goodwill at beginning of year $ 2,772,094
Adjustment to purchased goodwill (55,581)
--------------
Goodwill at end of year $ 2,716,513
==============
9
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
The following table provides a reconciliation of prior year reported net income
to adjusted net income had FAS 142 been applied at the beginning of fiscal 2001:
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in thousands of U.S. dollars, except per share data)
Reported net income $ 103,900 $ 131,517 $ 301,705 $ 249,911
Add back: Goodwill amortization - 19,872 - 39,752
---------- ---------- ---------- ==========
Adjusted net income $ 103,900 $ 151,389 $ 301,705 $ 289,663
========== ========== ========== ==========
Basic earnings per share:
Reported earnings per share $ 0.37 $ 0.54 $ 1.11 $ 1.02
Add back: Goodwill amortization - 0.09 - 0.17
---------- ---------- ---------- ----------
Adjusted earning per share $ 0.37 $ 0.63 $ 1.11 $ 1.19
========== ========== ========== ==========
Diluted earnings per share:
Reported earnings per share $ 0.36 $ 0.52 $ 1.06 $ 0.98
Add back: Goodwill amortization - 0.08 - 0.16
---------- ---------- ---------- ----------
Adjusted earning per share $ 0.36 $ 0.60 $ 1.06 $ 1.14
========== ========== ========== ==========
3. Securities on loan
We participate in a securities lending program whereby certain securities from
our portfolio are loaned to other institutions for short periods of time. The
market value of the loaned securities is monitored on a daily basis with
additional collateral obtained or refunded as the market value of the loaned
securities changes. Our policy is to require initial cash collateral equal to
102 percent of the fair value of the loaned securities. The proceeds from the
collateral are invested in short-term investments and are reported on the
balance sheet. We maintain full ownership rights to the securities loaned, and
continue to earn interest on them. We share a portion of the interest earned
on these short-term investments with the lending agent. In addition, we have
the ability to sell the securities while they are on loan. We have an
indemnification agreement with the lending agents in the event a borrower
becomes insolvent or fails to return securities. Securities lending collateral
of $419 million is recorded in short-term investments and in liabilities. The
fair value of the securities on loan of $411 million at June 30, 2002 is
reported on a separate line in total investments and cash. There were no
securities loaned in 2001.
4. Commitments and contingencies
The Company has considered asbestos and environmental claims and claims
expenses in establishing the liability for unpaid losses and loss expenses.
The Company has developed reserving methods, which incorporate new sources of
data with historical experience to estimate the ultimate losses arising from
asbestos and environmental exposures. The reserves for asbestos and
environmental claims and claims expenses represent management's best estimate
of future loss and loss expense payments and recoveries which are expected to
develop over the next several decades. The Company continuously monitors
evolving case law and its effect on environmental and latent injury claims.
While reserving for these claims is inherently uncertain, the Company believes
that the reserves carried for these claims are adequate based on known facts
and current law.
10
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
5. Restricted stock awards
Under the Company's long-term incentive plans, 832,150 restricted Ordinary
Shares were awarded during the six months ended June 30, 2002, to officers of
the Company and its subsidiaries. These shares vest at various dates through
June 2006. In addition, during the period, 12,588 restricted Ordinary Shares
were awarded to outside directors under the terms of the 1995 Outside
Directors Plan. These shares vest in May 2003.
At the time of grant the market value of the shares awarded under these grants
is recorded as unearned stock grant compensation and is presented as a
separate component of shareholders' equity. The unearned compensation is
charged to income over the vesting period.
6. Earnings per share
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in thousands of U.S. dollars, except per share data)
Numerator:
Net income before cumulative effect of adopting
a new accounting standard $ 103,900 $ 131,517 $ 301,705 $ 272,581
Dividends on FELINE PRIDES (6,415) (6,415) (12,830) (12,763)
------------ ------------ ------------ ------------
Net income available to holders of Ordinary
Shares before cumulative effect 97,485 125,102 288,875 259,818
Cumulative effect of adopting a new accounting
standard - - - (22,670)
------------ ------------ ------------ ------------
Net income available to holders of Ordinary
Shares $ 97,485 $ 125,102 $ 288,875 $ 237,148
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 259,863,879 231,175,889 259,460,287 231,790,182
Dilutive effect of FELINE PRIDES 3,416,695 3,256,112 3,758,796 3,326,176
Effect of other dilutive securities 7,900,655 6,695,811 8,030,284 6,785,925
------------ ------------ ------------ ------------
Denominator for diluted earnings per share:
Adjusted weighted average shares outstanding
and assumed conversions 271,181,229 241,127,812 271,249,367 241,902,283
============ ============ ============ ============
Basic earnings per share:
Earnings per share before cumulative effect
of adopting a new accounting standard $ 0.37 $ 0.54 $ 1.11 $ 1.12
============ ============ ============ ============
Earnings per share $ 0.37 $ 0.54 $ 1.11 $ 1.02
============ ============ ============ ============
Diluted earnings per share:
Earnings per share before cumulative effect
of adopting a new accounting standard $ 0.36 $ 0.52 $ 1.06 $ 1.07
============ ============ ============ ============
Earnings per share $ 0.36 $ 0.52 $ 1.06 $ 0.98
============ ============ ============ ============
11
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
7. Credit facilities
In April 2002, the Company renewed its $800 million, 364-day revolving
credit facility. This facility, together with the Company's $250 million,
five-year revolving credit facility, which was last renewed in May 2000,
are available for general corporate purposes and each of the facilities may
also be used as commercial paper back-up. The five-year facility also
permits the issuance of letters of credit. In 2000, $25 million was drawn
under the five-year facility and was repaid in April 2002.
ACE Tempest Re also maintained an uncollateralized, syndicated revolving credit
facility in the amount of $72.5 million, which was guaranteed by the Company.
This facility expired in February 2002 and was not renewed. No amounts had been
drawn on this facility.
At June 30, 2002, ACE Guaranty Re Inc. was party to a credit facility which
provides up to $150 million specifically designed to provide rating agency
qualified capital to further support ACE Guaranty Re Inc.'s claims-paying
resources. In 2001, the facility's expiry date was extended to October
2008. ACE Guaranty Re Inc. has not borrowed under this credit facility.
8. Debt
The following table outlines the Company's consolidated debt position at June
30, 2002 and December 31, 2001:
June 30 December 31
2002 2001
------------ -------------
(in millions of U.S. dollars)
Short-term debt
ACE INA commercial paper $ 149 $ -
ACE Financial Services Debentures due 2002 75 75
ACE Financial Services Note - 25
Reverse Repurchase Agreements - 395
------- -------
$ 224 $ 495
======= =======
Long-term debt
ACE INA Notes due 2004 $ 400 $ 400
ACE INA Notes due 2006 300 299
ACE Limited Senior Notes due 2007 499 -
ACE US Holdings Senior Notes due 2008 250 250
ACE INA Subordinated Notes due 2009 250 300
ACE INA Debentures due 2029 100 100
------- -------
$ 1,799 $ 1,349
======= =======
Trust Preferred Securities
ACE INA RHINO Preferred Securities due 2002 $ 200 $ 400
Capital Re LLC Monthly Income
Preferred Securities due 2044 75 75
ACE INA Trust Preferred Securities due 2029 100 100
ACE INA Capital Securities due 2030 300 300
------- --------
$ 675 $ 875
======= ========
12
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
a) Commercial paper and money market facilities
In 1999, the Company arranged certain commercial paper programs. The programs
use revolving credit facilities as back-up facilities and provide for up to $2.8
billion in commercial paper issuance (subject to the availability of back-up
facilities, which currently total $1.05 billion) for ACE and for ACE INA.
In October 2001, the Company and certain subsidiaries executed securities
repurchase agreements with various counterparties. Under these repurchase
agreements, the Company agreed to sell securities and repurchase them at a
date in the future for a predetermined price. The amounts due to brokers
under the repurchase agreements at December 31, 2001 of $395 million were
repaid during the first quarter of 2002 using proceeds from commercial
paper raised during that quarter. In addition, the Company repaid $150
million of expiring commercial paper and the $25 million ACE Financial
Services bank note. The average cost of borrowing using commercial paper
was 2.0 percent for the three and six months ended June 30, 2002.
b) ACE Limited Senior Notes
In March 2002, ACE Limited issued $500 million of 6.0 percent notes due
April 1, 2007. The notes are not redeemable before maturity and do not have
the benefit of any sinking fund. These senior unsecured notes rank equally
with all of the Company's other senior obligations and contain a customary
limitation on lien provisions as well as customary events of default
provisions which, if breached, could result in the accelerated maturity of
such senior debt.
c) ACE INA subordinated notes
In 1999, ACE INA issued $300 million 11.2 percent unsecured subordinated notes
maturing in December 2009. The subordinated notes are callable subject to
certain call premiums. During the quarter, the Company repaid $50 million of
these notes and incurred debt prepayment expense of $11 million ($7 million, net
of tax), which is reported as other expenses in the statement of operations.
d) ACE INA RHINO preferred securities
In 1999, ACE RHINOS Trust sold in a private placement, $400 million of
Auction Rate Reset Preferred Securities ("Preferred Securities"). The sole
assets of the Trust consist of $412 million of Auction Rate Reset
Subordinated Notes Series A ("Subordinated Notes") issued by ACE INA.
Proceeds of the Ordinary Share Offering of September 12, 2000 which was
completed in satisfaction of a related agreement with Bank of America
Securities, were used to support our guarantee of the Subordinated Notes.
During the quarter the Company repaid $200 million in principal amount of
Preferred Securities. The Company also expects to repay the remaining $200
million of these Preferred Securities during the quarter ending
September 30, 2002.
9. Mezzanine Equity
In April 2000, the Company publicly offered and issued 6,000,000 FELINE PRIDES.
On May 8, 2000, exercise of the underwriter's over allotment option resulted in
the issuance of an additional 221,000 FELINE PRIDES, for aggregate net proceeds
of approximately $311 million. Each FELINE PRIDE initially consists of a unit
referred to as an Income PRIDE. Each Income PRIDE consists of (i) one 8.25
percent Cumulative Redeemable Preferred Share, Series A, liquidation preference
$50 per share, of the Company, and (ii) a purchase contract pursuant to which
the holder of the Income PRIDE agrees to purchase from the Company, on May 16,
2003, Ordinary Shares at the applicable settlement rate. On May 16, 2003
pursuant to the purchase contract, the holders of the FELINE PRIDES will be
required to purchase $311 million of our Ordinary Shares. Each preferred share
is pledged to the Company to secure the holders' obligations under the purchase
contract. A holder of an Income PRIDE can obtain the release of the preferred
share by substituting certain zero-coupon treasury securities as security for
performance under the purchase contract. The resulting unit consisting of the
zero-coupon treasury security and the purchase contract is a Growth PRIDE, and
13
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
the preferred shares would be a separate security. A holder of a Growth PRIDE
can convert it back into an Income PRIDE by depositing preferred shares as
security for performance under the purchase contract and thereby obtain the
release of the zero-coupon treasury securities.
The aggregate liquidation preference of the 8.25 percent Cumulative Redeemable
Preferred Shares is $311 million. Unless deferred by the Company, the preferred
shares pay dividends quarterly at a rate of 8.25 percent per year to May 16,
2003, and thereafter at the reset rate established pursuant to a remarketing
procedure. If the Company elects to defer dividend payments on the preferred
shares, the dividends will continue to accrue and the Company will be restricted
from paying dividends on its Ordinary Shares and taking certain other actions.
The preferred shares are not redeemable prior to June 16, 2003, on which date
they must be redeemed by the Company in whole.
10. Reinsurance
The Company purchases reinsurance to manage various exposures including
catastrophe risks. Although reinsurance agreements contractually obligate the
Company's reinsurers to reimburse it for the agreed upon portion of its gross
paid losses, they do not discharge the primary liability of the Company. The
amounts for net premiums written and net premiums earned in the statements of
operations are net of reinsurance. Direct, assumed and ceded amounts for these
items for the three and six months ended June 30, 2002 and 2001 are as follows:
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
------------- ------------- ------------- -------------
(in thousands of U.S. dollars)
Premiums written
Direct $ 2,347,328 $ 1,968,344 $ 4,462,455 $ 3,774,443
Assumed 581,627 434,317 1,584,646 1,189,856
Ceded (1,053,577) (932,016) (2,185,695) (1,758,536)
------------- ------------ ------------- -------------
Net premiums written $ 1,875,378 $ 1,470,645 $ 3,861,406 $ 3,205,763
============= ============ ============= =============
Premiums earned
Direct $ 2,130,803 $ 1,900,568 $ 3,842,723 $ 3,378,991
Assumed 517,318 422,007 1,088,396 915,695
Ceded (1,072,414) (937,388) (1,995,603) (1,540,383)
------------- ------------ ------------- -------------
Net premiums earned $ 1,575,707 $ 1,385,187 $ 2,935,516 $ 2,754,303
============= ============ ============= =============
14
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
The composition of the Company's reinsurance recoverable at June 30, 2002 and
December 31, 2001, is as follows:
June 30 December 31
2002 2001
-------------- -------------
(in thousands of U.S. dollars)
Reinsurance recoverable on paid losses and loss expenses $ 1,253,378 $ 1,066,495
Reinsurance recoverable on unpaid losses and loss expenses 11,180,944 11,120,888
------------ -------------
Total reinsurance recoverable 12,434,322 12,187,383
Bad debt provision (797,675) (788,937)
------------ -------------
Net reinsurance recoverable $ 11,636,647 $ 11,398,446
============ =============
The Company evaluates the financial condition of its reinsurers and
potential reinsurers on a regular basis and also monitors concentrations of
credit risk with reinsurers. The provision for unrecoverable reinsurance is
required principally due to the failure of reinsurers to indemnify ACE,
primarily because of disputes under reinsurance contracts and insolvencies.
Reinsurance disputes continue to be significant, particularly on larger and
more complex claims, including those related to asbestos and environmental
pollution. Provisions have been established for amounts estimated to be
uncollectible.
11. Deferred compensation obligation
The Company maintains a rabbi trust for deferred compensation plans for key
employees and executive officers. In accordance with EITF 97-14, "Accounting for
Deferred Compensation Agreements Where Amounts Earned are Held in a Rabbi Trust
and Invested", assets of the rabbi trust are to be consolidated with those of
the employer, and the value of the employer's stock held in the rabbi trust
should be classified in shareholders' equity and accounted for at historical
cost in a manner similar to treasury stock. The shares issued by the Company to
the rabbi trust are recorded in Ordinary Shares issued to employee trust and the
obligation has been recorded in deferred compensation obligation, both are
components of shareholders' equity.
12. Taxation
Under current Cayman Islands law, the Company is not required to pay any taxes
in the Cayman Islands on its income or capital gains. The Company has received
an undertaking that, in the event of any taxes being imposed, the Company will
be exempted from taxation in the Cayman Islands until the year 2013. Under
current Bermuda law, the Company and its Bermuda subsidiaries are not required
to pay any taxes in Bermuda on its income or capital gains. The Company has
received an undertaking from the Minister of Finance in Bermuda that, in the
event of any taxes being imposed, the Company will be exempt from taxation in
Bermuda until March 2016.
Income from the Company's operations at Lloyd's is subject to United Kingdom
corporation taxes. Lloyd's is required to pay U.S. income tax on U.S. connected
income ("U.S. income") written by Lloyd's syndicates. Lloyd's has a closing
agreement with the IRS whereby the amount of tax due on this business is
calculated by Lloyd's and remitted directly to the IRS. These amounts are then
charged to the personal accounts of the Names/Corporate Members in proportion to
their participation in the relevant syndicates. The Company's Corporate Members
are subject to this arrangement but, as UK domiciled companies, will receive UK
corporation tax credits for any U.S. income tax incurred up to the value of the
equivalent UK corporation income tax charge on the U.S. income.
15
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
ACE INA, ACE US Holdings and ACE Financial Services are subject to income
taxes imposed by U.S. authorities and file U.S. tax returns. Certain
international operations of the Company are also subject to income taxes
imposed by the jurisdictions in which they operate.
There can be no assurance that there will not be changes in applicable
laws, regulations or treaties, which might require the Company to change
the way it operates or become subject to taxation.
The income tax provision for the three and six months ended June 30, 2002 and 2001 is as follows:
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
----------- ------------ ------------ ------------
(in thousands of U.S. dollars)
Current tax expense $ 5,370 $ 6,669 $ 4,857 $ 29,117
Deferred tax expense 15,306 11,581 39,735 16,107
----------- ----------- ----------- -----------
Provision for income taxes $ 20,676 $ 18,250 $ 44,592 $ 45,224
=========== =========== =========== ===========
The weighted average expected tax provision has been calculated using pre-tax accounting income (loss)
in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate. A reconciliation
of the difference between the provision for income taxes and the expected tax provision at the
weighted average tax rate for the three and six months ended June 30, 2002 and 2001, is provided
below.
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
------------ ------------ ------------- -------------
(in thousands of U.S. dollars)
Expected tax provision at weighted
average rate $ 19,237 $ 11,856 $ 43,792 $ 35,969
Permanent differences
Tax-exempt interest (2,939) (3,806) (7,082) (7,641)
Goodwill - 4,458 - 8,913
Other 586 2,248 561 1,163
Net withholding taxes 3,792 3,494 7,321 6,820
----------- ----------- ------------ -----------
Provision for income taxes $ 20,676 $ 18,250 $ 44,592 $ 45,224
=========== =========== ============ ===========
16
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
The components of the net deferred tax asset at June 30, 2002 and December 31,
2001 are as follows:
June 30 December 31
2002 2001
--------------- ---------------
(in thousands of U.S. dollars)
Deferred tax assets
Loss reserve discount $ 497,255 $ 523,195
Foreign tax credits 150,742 155,079
Policyholder dividends 48,054 47,509
Net operating loss carry forward 479,026 495,048
Other 282,754 299,068
------------ ------------
Total deferred tax assets 1,457,831 1,519,899
------------ ------------
Deferred tax liabilities
Deferred policy acquisition costs 51,934 66,454
Unrealized appreciation on investments 58,726 28,570
Other 23,174 38,448
------------ ------------
Total deferred tax liabilities 133,834 133,472
------------ ------------
Valuation allowance 135,592 135,592
------------ ------------
Net deferred tax asset $ 1,188,405 $ 1,250,835
============ ============
The valuation allowance reflects management's assessment, based on available
information, that it is more likely than not that a portion of the deferred tax
asset will not be realized due to the inability of certain foreign subsidiaries
to generate sufficient taxable income. Adjustments to the valuation allowance
are made when there is a change in management's assessment of the amount of
deferred tax asset that is realizable.
At June 30, 2002, the Company has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $1.4 billion which are
available to offset future U.S. federal taxable income through 2021.
17
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
13. Subsidiary Issuer Information
The following tables present condensed consolidating financial information for ACE Limited (the "Parent Guarantor"), ACE INA
Holdings, Inc. and ACE Financial Services, Inc. (formerly Capital Re Corporation), (the "Subsidiary Issuers") at June 30, 2002
and December 31, 2001 and for the three and six months ended June 30, 2002 and 2001. The Subsidiary Issuers are indirect
wholly-owned subsidiaries of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor and the
Subsidiary Issuers under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries
are reflected in the Parent Guarantor's investment accounts and earnings. The Parent Guarantor fully and unconditionally
guarantees certain of the debt of the Subsidiary Issuers.
Condensed Consolidating Balance Sheet as at June 30, 2002
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Assets
Total investments and cash $ 354,545 $ 6,856,881 $ 956,397 $ 8,818,907 $ - $ 16,986,730
Insurance and reinsurance
balances receivable - 1,999,622 24,329 1,157,291 - 3,181,242
Reinsurance recoverable - 9,362,078 815 2,273,754 - 11,636,647
Goodwill - 2,130,561 96,723 489,229 - 2,716,513
Investments in subsidiaries 6,654,784 - 152,000 (152,000) (6,654,784) -
Due from subsidiaries and
affiliates, net 235,453 (139,236) (49,159) 188,395 (235,453) -
Other assets 38,463 3,330,542 212,131 1,250,948 - 4,802,084
----------- ----------- ----------- ----------- ------------ ------------
Total assets $ 7,283,245 $23,510,448 $ 1,393,236 $14,026,524 $ (6,890,237) $ 39,323,216
=========== =========== =========== =========== ============ ============
Liabilities
Unpaid losses and loss expenses $ - $14,182,277 $ 75,426 $ 6,403,656 $ - $ 20,661,359
Future policy benefits for life
and annuity contracts - - - 392,625 - 392,625
Unearned premiums - 2,642,874 343,241 1,950,688 - 4,936,803
Short-term debt - 149,365 - - - 224,364
Long-term debt 499,197 1,049,606 74,999 250,000 - 1,798,803
Trust preferred securities - 600,000 75,000 - - 675,000
Other liabilities 89,191 2,425,120 130,055 1,295,039 - 3,939,405
----------- ------------ ----------- ----------- ------------ ------------
Total liabilities 588,388 21,049,242 698,721 10,292,008 - 32,628,359
----------- ------------ ----------- ----------- ------------ ------------
Mezzanine equity 311,050 - - - - 311,050
----------- ------------ ----------- ----------- ------------ ------------
Total shareholders' equity 6,383,807 2,416,206 694,515 3,734,516 (6,890,237) 6,383,807
----------- ------------ ----------- ----------- ------------ ------------
Total liabilities, mezzanine
equity and shareholders' equity $ 7,283,245 $23,510,448 $ 1,393,236 $14,026,524 $ (6,890,237) $ 39,323,216
=========== ============ =========== =========== ============ ============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
18
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Balance Sheet as at December 31, 2001
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Assets
Total investments and cash $ 489,596 $ 6,443,230 $ 901,905 $ 8,101,182 $ - $ 15,935,913
Insurance and reinsurance balances
receivable - 1,715,873 24,075 781,614 - 2,521,562
Reinsurance recoverable - 9,259,608 8,194 2,130,644 - 11,398,446
Goodwill - 2,186,142 96,723 489,229 - 2,772,094
Investments in subsidiaries 5,621,604 - 152,000 (152,000) (5,621,604) -
Due from subsidiaries and
affiliates, net 348,372 (478,645) (11,862) 490,507 (348,372) -
Other assets 64,570 3,313,941 184,509 995,729 - 4,558,749
----------- ------------ ----------- ------------ ------------ ------------
Total assets $ 6,524,142 $ 22,440,149 $ 1,355,544 $ 12,836,905 $ (5,969,976) $ 37,186,764
=========== ============ =========== ============ ============ ============
Liabilities
Unpaid losses and loss expenses $ - $ 14,468,024 $ 75,823 $ 6,184,275 $ - $ 20,728,122
Future policy benefits for life
and annuity contracts - - - 382,730 - 382,730
Unearned premiums - 2,055,459 323,951 1,474,019 - 3,853,429
Short-term debt - - 25,000 395,428 - 495,408
Long-term debt - 1,099,473 74,980 250,000 - 1,349,473
Trust preferred securities - 800,000 75,000 - - 875,000
Other liabilities 106,385 2,395,745 138,586 444,129 - 3,084,845
----------- ------------ ----------- ------------ ------------ ------------
Total liabilities 106,385 20,818,701 713,340 9,130,581 - 30,769,007
----------- ------------ ----------- ------------ ------------ ------------
Mezzanine equity 311,050 - - - - 311,050
----------- ------------ ----------- ------------ ------------ ------------
Total shareholders' equity 6,106,707 1,621,448 642,204 3,706,324 (5,969,976) 6,106,707
----------- ------------ ----------- ------------ ------------ ------------
Total liabilities, mezzanine equity
and shareholders' equity $ 6,524,142 $ 22,440,149 $ 1,355,544 $ 12,836,905 $ (5,969,976) $ 37,186,764
=========== ============ =========== ============ ============ ============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
19
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Statement of Operations
For the three months ended June 30, 2002
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net premiums written $ - $ 988,125 $ 34,882 $ 852,371 $ - $ 1,875,378
Net premiums earned - 759,974 26,708 789,025 - 1,575,707
Net investment income 12,626 80,066 11,961 88,213 7,938 200,804
Other income (expenses) - (11,071) - (997) - (12,068)
Equity in earnings of subsidiaries 148,903 - - - (148,903) -
Net realized gains (losses) on
investments (29,959) (8,680) (23,762) (77,320) - (139,721)
Losses and loss expenses - 526,724 3,113 431,112 - 960,949
Life and annuity benefits - - - 23.311 - 23,311
Policy acquisition costs and
administrative expenses 18,985 208,972 12,709 224,149 (881) 463,934
Interest expense 6,436 39,006 3,238 5,415 (2,143) 51,952
Income tax expense 2,249 14,194 (3,789) 8,022 - 20,676
---------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 103,900 $ 31,393 $ (364) $ 106,912 $ (137,941) $ 103,900
========== =========== =========== =========== =========== ===========
Condensed Consolidating Statement of Operations
For the three months ended June 30, 2001
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net premiums written $ - $ 609,595 $ 28,171 $ 832,879 $ - $ 1,470,645
Net premiums earned - 619,706 19,501 745,980 - 1,385,187
Net investment income 13,741 88,208 11,485 89,716 (6,883) 196,267
Other income - - - 1,088 - 1,088
Equity in earnings of subsidiaries 134,832 - - - (134,832) -
Net realized gains (losses) on
investments - (26,800) 17,354 25,010 - 15,564
Losses and loss expenses - 445,435 2,960 506,446 - 954,841
Life and annuity benefits - - - 28,152 - 28,152
Policy acquisition costs and
administrative expenses 17,417 185,087 9,227 184,500 (397) 395,834
Amortization of goodwill - 14,490 1,051 4,331 - 19,872
Interest expense (2,417) 44,529 3,275 5,319 (1,066) 49,640
Income tax expense 2,056 519 7,548 8,127 - 18,250
--------- ------------ ---------- ------------ ----------- -----------
Net income (loss) $ 131,517 $ (8,946) $ 24,279 $ 124,919 $ (140,252) $ 131,517
========= ============ ========== ============ =========== ===========
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
20
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Statement of Operations
For the six months ended June 30, 2002
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net premiums written $ - $ 1,811,219 $ 45,750 $ 2,004,437 $ - $ 3,861,406
Net premiums earned - 1,369,461 48,416 1,517,639 - 2,935,516
Net investment income 29,076 160,252 23,451 206,889 (18,729) 400,939
Other income (expense) - (11,071) - 3,802 - (7,269)
Equity in earnings of subsidiaries 340,953 - - - (340,953) -
Net realized gains (losses) on
investments (22,684) (34,473) (18,921) (89,524) - (165,602)
Losses and loss expenses - 948,173 5,842 860,079 - 1,814,094
Life and annuity benefits - - - 46,307 - 46,307
Policy acquisition costs and
administrative expenses 33,089 372,142 23,277 432,186 (1,762) 858,932
Interest expense 8,126 80,632 6,547 9,255 (6,606) 97,954
Income tax expense 4,425 26,145 1,439 12,583 - 44,592
----------- ----------- ---------- ----------- ---------- -----------
Net income $ 301,705 $ 57,077 $ 15,841 $ 278,396 $ (351,314) $ 301,705
=========== =========== ========== =========== ========== ===========
Condensed Consolidating Statement of Operations
For the six months ended June 30, 2001
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net premiums written $ - $ 1,209,775 $ 43,438 $ 1,952,550 $ - $ 3,205,763
Net premiums earned - 1,124,412 38,361 1,591,530 - 2,754,303
Net investment income 27,410 187,154 23,663 175,983 (13,513) 400,697
Other income - - - 2,685 - 2,685
Equity in earnings of subsidiaries 251,560 - - - (251,560) -
Net realized gains (losses) on
investments - (29,953) 23,658 2,484 - (3,811)
Losses and loss expenses - 791,235 5,776 1,109,123 - 1,906,134
Life and annuity benefits - - - 28,805 - 28,805
Policy acquisition costs and 19,276
administrative expenses 30,262 350,567 357,706 (397) 757,414
Amortization of goodwill - 28,980 2,102 8,670 - 39,752
Interest expense (5,248) 93,432 6,646 11,205 (2,071) 103,964
Income tax expense 4,045 14,325 14,752 12,102 - 45,224
----------- ----------- ---------- ----------- ---------- -----------
Income before cumulative effect of
adopting a new accounting standard 249,911 3,074 37,130 245,071 (262,605) 272,581
Cumulative effect of adopting a new
accounting standard (net of
income tax) - (50) (22,800) 180 - (22,670)
----------- ----------- ---------- ----------- ---------- -----------
Net income $ 249,911 $ 3,024 $ 14,330 $ 245,251 $ (262,605) $ 249,911
=========== =========== ========== =========== ========== ===========
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
21
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the six months ended June 30, 2002
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net cash flows from (used for)
operating activities $ (105,282) $ (112,983) $ 23,392 $ 765,968 $ - $ 571,095
---------- ------------ ----------- ----------- ---------- ------------
Cash flows from investing activities
Purchases of fixed maturities 1,705 (1,151,900) (325,832) (7,236,859) - (8,712,886)
Purchases of equity securities - (45,513) - (83,390) - (128,903)
Sales of fixed maturities 73,708 1,065,093 289,961 6,945,014 - 8,373,776
Sales of equity securities - 44,234 - 40,053 - 84,287
Maturities of fixed maturities - - - 139,875 - 139,875
Net realized gains (losses) on
financial futures contracts - - - (60,800) - (60,800)
Acquisition of subsidiaries - - - 54,728 - 54,728
Other - - 3,537 (46,787) - (43,250)
---------- ------------ ----------- ----------- ---------- ------------
Net cash from (used for) investing
activities $ 75,413 $ (88,086) $ (32,334) $ (248,166) $ - $ (293,173)
---------- ------------ ----------- ----------- ---------- ------------
Cash flows from financing activities
Dividends paid on Ordinary Shares (78,264) - - - - (78,264)
Dividends paid on FELINE
PRIDES (12,830) - - - - (12,830)
Proceeds from short term debt - (375,436) (25,000) 129,393 - (271,044)
Proceeds from long term debt 499,155 (50,000) - 175 - 449,330
Advances to (from) affiliates 224,052 - 9,847 (233,899) - -
Proceeds from exercise of options
for Ordinary Shares 37,540 - - - - 37,540
Proceeds from shares issued under
ESPP 3,744 - - - - 3,744
Repayment of trust preferred
securities - (200,000) - - - (200,000)
Capitalization of subsidiary (869,276) 916,852 25,000 (72,576) - -
Dividends received from subsidiaries 195,000 - - (195,000) - -
---------- ------------ ----------- ---------- ---------- ------------
Net cash used for financing
activities $ (879) $ 291,416 $ 9,847 $ (371,908) $ - $ (71,524)
---------- ------------ ----------- ---------- ---------- ------------
Net increase in cash (30,748) 90,347 905 145,894 - 206,398
---------- ------------ ----------- ---------- ---------- ------------
Cash - beginning of period 32,525 355,327 1,027 282,502 - 671,381
---------- ------------ ----------- ---------- ---------- ------------
Cash - end of period $ 1,777 $ 445,674 $ 1,932 $ 428,396 $ - $ 877,779
========== ============ =========== ========== ========== ============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
22
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the six months ended June 30, 2001
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net cash flows from (used for) $ (9,708) $ (460,163) $ 59,043 $ 884,173 $ - $ 473,345
Operating activities ----------- ----------- ----------- ------------- ---------- ------------
Cash flows from investing activities
Purchases of fixed maturities (13,988) (1,067,197) (498,929) (6,109,231) - (7,689,345)
Purchases of equity securities - (69,294) - (46,676) - (115,970)
Sales of fixed maturities - 1,528,351 466,513 5,388,146 - 7,383,010
Sales of equity securities - 76,346 37,326 - 113,672
Maturities of fixed maturities - - 4,500 19,500 - 24,000
Net realized gains (losses) on
financial futures contracts - - - (17,695) - (17,695)
Other 833 (3,372) - (34,707) - (37,246)
----------- ----------- ----------- ------------- ---------- ------------
Net cash from (used for) investing
activities $ (13,155) $ 464,834 $ (27,916) $ (763,337) $ - $ (339,574)
----------- ----------- ----------- ------------- ---------- ------------
Cash flows from financing activities
Dividends paid on Ordinary Shares (60,070) - - - - (60,070)
Dividends paid on FELINE PRIDES (12,835) - - - - (12,835)
Proceeds from short term debt, net - 38,784 - (4) - 38,780
Advances to affiliates (129,405) - - 129,405 - -
Proceeds from exercise of options
for Ordinary Shares 16,474 - - - - 16,474
Proceeds from shares issued under
ESPP 2,810 - - - - 2,810
Repurchase of Ordinary Shares (49,680) - - - - (49,680)
Dividends received from subsidiaries 223,691 - - (223,691) - -
----------- ----------- ----------- ------------- ---------- ------------
Net cash from (used for) financing
activities $ (9,015) $ 38,784 $ - $ (94,290) $ - $ (64,521)
----------- ----------- ----------- ------------- ---------- ------------
Net increase (decrease) in cash (31,878) 43,455 31,127 26,546 - 69,250
Cash - beginning of period 46,516 253,447 26,576 281,530 - 608,069
----------- ----------- ----------- ------------- ---------- ------------
Cash - end of period $ 14,638 $ 296,902 $ 57,703 $ 308,076 $ - $ 677,319
=========== =========== =========== ============= ========== ============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
23
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
14. Segment information
Following changes in executive management responsibilities, during the
first quarter of 2002, the Company reassessed and changed its reporting
segments from the individual operating units to the following lines of
business: Insurance - North American, Insurance - Overseas General, Global
Reinsurance and Financial Products.
Insurance - North American includes the operations of ACE USA and ACE Bermuda,
excluding the Financial Solutions business in both the U.S. and Bermuda which is
now included in the new Financial Products segment, and ACE Canada. ACE USA
primarily comprises the domestic U.S. and Canadian operations of ACE INA, which
were acquired on July 2, 1999, and the operations of ACE US Holdings, which were
acquired on January 2, 1998. These operations provide property and casualty
insurance and reinsurance coverage, including excess liability, professional
lines, satellite, excess property and political risk, to a diverse group of
industrial, commercial and other enterprises.
Insurance - Overseas General includes the operations of ACE International,
including ACE Europe, ACE Japan, ACE Far East and ACE Latin America. ACE
International primarily comprises the international operations of ACE INA, which
were acquired on July 2, 1999. ACE International provides property and casualty
insurance, accident and health insurance and consumer-oriented products to
individuals, mid-sized firms and large commercial clients. In addition, ACE
International provides customized and comprehensive insurance policies and
services to multinational firms and their cross-border subsidiaries. Insurance -
Overseas General also includes the insurance operations of ACE Global Markets,
which primarily encompasses the Company's operations in the Lloyd's market
(including for segment purposes Lloyd's operations owned by ACE Financial
Services). ACE Global Markets provides funds at Lloyd's to support underwriting
by the Lloyd's syndicates managed by Lloyd's managing agencies which are owned
by the Company. The reinsurance operation of ACE Global Markets is included in
the new Global Reinsurance segment.
Global Reinsurance comprises the operations of ACE Tempest Re, ACE Tempest US
and ACE Tempest UK and the reinsurance operations of ACE Global Markets. These
subsidiaries primarily include property catastrophe reinsurance provided
worldwide to insurers of commercial and personal property. Global Reinsurance
also includes the operations of ACE Tempest Life Reinsurance. The principal
business of ACE Tempest Life Reinsurance Ltd. is to provide reinsurance coverage
to other life insurance companies. The life reinsurance business completed its
first full year of operations in 2001.
Financial Products includes the financial guaranty business of ACE Guaranty Re
and ACE Capital Re International ("ACE Financial Services"). Financial Products
also includes the financial solutions business in the U.S. and Bermuda. ACE
Financial Services provides value-added reinsurance products in several
specialty insurance markets. ACE Financial Services has two principal divisions:
financial guaranty and financial risks. The financial guaranty division is
comprised of municipal and non-municipal financial guaranty reinsurance and
credit default swaps. The financial risks division is comprised of mortgage
guaranty reinsurance, trade credit reinsurance and title reinsurance. The
financial solutions business includes insurance and reinsurance solutions to
complex risks that generally can not be adequately addressed by the traditional
insurance marketplace.
a) The following tables summarize the operations by segment for the three and
six months ended June 30, 2002 and 2001.
b) For segment reporting purposes, certain items have been presented in a
different manner than in the consolidated financial statements. For segment
reporting purposes, items considered non-recurring in nature have been
aggregated and shown separately net of related taxes, and net realized
gains (losses) have been presented net of related taxes.
24
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
Statement of Operations by Segment
For the three months ended June 30, 2002
Insurance - Insurance - Corporate
North Overseas Global Financial and ACE
American General Reinsurance Products Other(1) Consolidated
-------- ------- ----------- -------- ----- ------------
(in thousands of U.S. Dollars)
Operations Data
Property and Casualty
Gross premiums written $ 1,427,608 $ 941,103 $ 214,209 $ 318,322 $ - $ 2,901,242
Net premiums written 718,301 616,378 197,510 316,518 - 1,848,707
Net premiums earned 605,985 565,339 149,921 228,153 - 1,549,398
Losses and loss expenses 396,135 345,313 52,491 167,010 - 960,949
Policy acquisition costs 50,346 127,838 29,217 21,876 - 229,277
Administrative expenses 86,612 87,857 9,430 16,922 27,110 227,931
----------- ----------- ---------- ----------- ----------- ------------
Underwriting income 72,892 4,331 58,783 22,345 (27,110) 131,241
----------- ----------- ---------- ----------- ----------- ------------
Life
Gross premiums written - - 27,713 - - 27,713
Net premiums written - - 26,671 - - 26,671
Net premiums earned - - 26,309 - - 26,309
Life and annuity benefits - - 23,311 - - 23,311
Policy acquisition costs - - 4,931 - - 4,931
Administrative expenses - - 1,795 - - 1,795
Net investment income - - 5,930 - - 5,930
----------- ----------- ---------- ----------- ----------- ------------
Underwriting income - - 2,202 - - 2,202
----------- ----------- ---------- ----------- ----------- ------------
Net investment income -
property and casualty 103,383 27,615 23,182 46,119 (5,425) 194,874
Other income (expense) (674) 22 - (345) - (997)
Interest expense 8,080 479 4,465 3,278 35,650 51,952
Income tax expense 41,134 4,987 1,858 7,927 (16,845) 39,061
----------- ----------- ---------- ----------- ----------- ------------
Income excluding net realized gains
(losses) & non-recurring expenses 126,387 26,502 77,844 56,914 (51,340) 236,307
Debt prepayment expenses* - - - - (7,196) (7,196)
----------- ----------- ---------- ----------- ----------- ------------
Income excluding net realized gains
(losses) 126,387 26,502 77,844 56,914 (58,536) 229,111
Net realized gains (losses)* (28,586) (4,386) (26,439) (35,841) (29,959) (125,211)
----------- ----------- ---------- ----------- ----------- ------------
Net income $ 97,801 $ 22,116 $ 51,405 $ 21,073 $ (88,495) $ 103,900
=========== =========== ========== =========== =========== ============
* Shown net of income tax
(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
25
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
Statement of Operations by Segment
For the three months ended June 30, 2001
Insurance - Insurance - Corporate
North Overseas Global Financial and ACE
American General Reinsurance Products Other(1) Consolidated
-------- ------- ----------- -------- ----- ------------
(in thousands of U.S. Dollars)
Operations Data
Property and Casualty
Gross premiums written $ 1,142,367 $ 861,785 $ 104,567 $ 263,903 $ - $ 2,372,622
Net premiums written 524,975 566,771 84,984 263,876 - 1,440,606
Net premiums earned 481,171 492,778 85,528 295,671 - 1,355,148
Losses and loss expenses 347,231 299,016 50,660 257,934 - 954,841
Policy acquisition costs 52,360 108,842 15,776 9,668 - 186,646
Administrative expenses 80,651 78,664 5,482 12,857 23,469 201,123
----------- ----------- ----------- ----------- ----------- ------------
Underwriting income 929 6,256 13,610 15,212 (23,469) 12,538
----------- ----------- ----------- ----------- ----------- ------------
Life
Gross premiums written - - 30,039 - - 30,039
Net premiums written - - 30,039 - - 30,039
Net premiums earned - - 30,039 - - 30,039
Life and annuity benefits - - 28,152 - - 28,152
Policy acquisition costs - - 994 - - 994
Administrative expenses - - 698 - - 698
Net investment income - - 335 - - 335
----------- ----------- ----------- ----------- ----------- ------------
Underwriting income (loss) - - 530 - - 530
----------- ----------- ----------- ----------- ----------- ------------
Net investment income -
property and casualty 105,428 29,025 17,449 41,954 2,076 195,932
Other income (expense) 826 (183) - 445 - 1,088
Amortization of goodwill (90) 919 3,502 1,051 14,490 19,872
Interest expense 8,089 631 - 3,282 37,638 49,640
Income tax expense (benefit) 26,927 6,137 3,875 5,628 (17,423) 25,144
----------- ----------- ----------- ----------- ----------- ------------
Income excluding net realized gains
(losses) and non-recurring expenses 72,257 27,411 24,212 47,650 (56,098) 115,432
Non-recurring expenses* - (3,970) (491) - - (4,461)
----------- ----------- ----------- ----------- ----------- ------------
Income excluding net realized gains
(losses) 72,257 23,441 23,721 47,650 (56,098) 110,971
Net realized gains (losses)* 5,381 (8,906) 1,353 22,718 - 20,546
----------- ----------- ----------- ----------- ----------- ------------
Net income $ 77,638 $ 14,535 $ 25,074 70,368 $ (56,098) $ 131,517
=========== =========== =========== =========== =========== ============
* Shown net of income tax
(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
26
ACE LIMITED AND SUBSIDIARIES
Notes to interim consolidated Financial Statements (cont'd)
(Unaudited)
Statement of Operations by Segment
For the six months ended June 30, 2002
Insurance - Insurance - Corporate
North Overseas Global Financial and ACE
American General Reinsurance Products Other(1) Consolidated
-------- ------- ----------- -------- ----- ------------
(in thousands of U.S. Dollars)
Operations Data
Property and Casualty
Gross premiums written $ 2,692,686 $ 1,903,375 $ 588,175 $ 805,954 $ - $ 5,990,190
Net premiums written 1,231,164 1,230,586 551,832 792,874 - 3,806,456